This question is particularly relevant to the Boston area technology sector because if Digital Equipment Corp. (DEC) still existed it would be an anchor company in the area: an anchor company that would provide a foundation for the region’s business, technology, and culture; an anchor company that would provide a degree of stability, scale, international reach, and heritage to the area’s technology sector.

Unfortunately, since DEC’s failure in the 1990s, the Boston area has lacked major technology sector anchor companies of DEC’s relative scale.

The Boston area does have notable smaller companies and local branch offices of companies headquartered elsewhere, but these do not provide the benefits of large scale anchor companies.

Looking Back at Inventing the Future

Despite infamous quotes taken out of context like the 1977 “There is no reason for any individual to have a computer in his home”, DEC had significant development projects in personal computers, workstations, and digital media, and had demonstration projects in touchpads, handheld devices, and interactive interfaces. DEC supported leading edge research at many universities and at its own corporate research labs. DEC knew and invented the future of computing technology.

DEC provided an environment where every key concept of the future of computing was actively discussed, worked on, and promulgated.

DEC regularly maintained and updated technology projections looking 10-20 years into the future development of computing, communications, and storage — DEC could answer when GHz, Gbs, and GB would become pervasive. In retrospect, these internal projections turned out to be fairly accurate.

DEC’s failure was not caused by a failure to understand the future. DEC had the data.

Corporate and Regional Inertia

On some fundamental levels, DEC was a timesharing company. The company’s success derived from the company’s timesharing products and the cost effectiveness of sharing computing resources. Thus, not sharing resources, i.e., dedicating computing resources to an individual, ran afoul of the timesharing success mentality. In product planning discussions across the company, a contrived timesharing story was generally better received than a more prescient personal computing story.

In addition, DEC’s lengthy product development process (waterfall) was not well suited to rapid and iterative development processes (agile) that were emerging.

Further, DEC’s sales force was oriented toward selling large expensive timesharing systems instead of lots of less expensive PCs, and the sales processes were oriented toward selling to companies and not to consumers.

To a large extent, DEC’s organizational behavior should not be surprising. Of course, in the absence of external factors, an organization will continue to pursue the strategies and activities that achieved past success. To do so is rational. However, the key phrase is “absence of external factors”.

Nothing was happening or could happen external to DEC that could offer a counterpoint to DEC’s internal status quo. An individual in DEC, who might be motivated to pursue the next thing, had no where to go. Not only did DEC as a corporation not really embrace alternate directions of computing, but the entire regional community and culture was not responsive. You were caught in a Catch-22. You couldn’t get investor funding. You couldn’t create or go to a startup because of your non-compete. If you left DEC, you were reminded of your non-compete during your exit interview. It didn’t matter that DEC wasn’t going to pursue the idea.

Though DEC was the largest company in the Boston area at the time, the many other technology companies in the area were also promoting the same culture that constrained innovation.

Since you couldn’t create a startup to pursue the next thing, that startup wasn’t available as counterpoint within the regional community to DEC’s internal collective intelligence (groupthink). That startup wasn’t available as a potential acquisition for DEC. That startup wasn’t available to inject new ideas into DEC. That startup wasn’t available to validate DEC’s innovative internal developments. This was not limited to just DEC, all regional technology sector companies, including more conventional startups, suffered the same fate. The notional “next thing” startups were not available to drive innovation in the regional community, and were not available to drive innovation in the regional culture.

However, if non-competes had not existed, it would have been easier to pursue innovation despite corporate groupthink and despite regional groupthink. If non-competes had not existed, a regional culture of innovation could have evolved, would have been less enamored and trapped by past successes, and would have provided more fertile environments for new ideas, new technologies, and new markets.

DEC and HP, By the Numbers

During the 1970s and 1980s, DEC and HP were often compared to each other. Both companies had similar products, strategies, cultures, and founding histories. HP did have other product lines such as electronic instruments, and had early success with pocket calculators. However, the ubiquitous benefits of DEC’s VAX/VMS product family dominated the computer industry in the 1980s, and seemed to threaten HP’s future.

But today, HP still exists. DEC does not.

HP existed, grew, and continues to thrive in an environment without non-competes. DEC failed in an environment that enforced non-competes.

Here are two charts comparing DEC and HP. The data comes from the companies’ respective annual reports (SEC 10-K filings) for the period from 1979 to 1997. (In 1998, DEC was acquired by Compaq.)

Chart 1 shows the number of employees worldwide in DEC (burgandy line) and HP (blue line). The year labels mark the first of the year. DEC ended its fiscal year on June 30; HP ends its fiscal year on October 31.

DEC increased its employees in the late 1980s to support anticipated growth, but obviously ran into problems in the early 1990s.

For both DEC and HP, a significant portion of employees were located in their respective headquarters area. These positions were relatively well paid, and provided significant benefit to the respective regional economies.

Click on chart to see full size.

Chart 2 shows annual revenue for DEC and HP. During the 1980s, DEC’s VAX/VMS products gave it a slight lead in overall revenues. By 1992, HP overtook any advantage DEC had. HP continued to expand its number of employees and the size of its market.

HP’s most recent annual report, for the fiscal year ending October 31 2010, lists 324,600 total worldwide employees and $126B in annual revenue.

Click on chart to see full size.

Eliminating Non-Competes the Hard Way

In the 1990′s, when DEC and other Boston area technology companies failed, their employee non-compete agreements were effectively nullified. Unhampered by non-compete agreements, the Boston area then saw a burst of startup companies leading into the dot com era and the web 2.0 era.

In effect, eliminating the non-compete agreements resulted in a burst of startups. But, it was corporate failures, not a change of policy and culture, that eliminated the non-competes.

Unfortunately, these resulting startup companies continued to enforce their own non-compete agreements, and increasingly were even more egregious in how they used non-competes. Though startups were created, much of the area’s culture did not evolve. As the startups grew, they appeared to get stuck in the same kind of groupthink and same kind of fabricated reality described above. Again, there was no way to create the external factors to motivate adoption of emerging technologies, development methods, and markets.

A one time elimination of non-competes was not enough.

In a period of major technological advance, 1990-2010, when major companies were being created in other technology regions, zero companies of similar scale were created in Boston.

To see an example of the benefit to innovation of being free of non-competes, consider the flow of employees between companies like Google and Facebook. Facebook has been able to grow rapidly during a critical period by hiring employees away from Google and from other area companies.

If Facebook were in a region where non-competes were in force, Facebook would not have been able to grow and to build itself into the $45B+ market cap company it currently is.

Is Google being significantly harmed by Facebook poaching its employees? No, for at least three reasons: (1) When Google was in its critical growth phase, it benefited by being able to hire without the constraint of a non-compete. (2) Google now can always attempt to retain particular individuals from moving to Facebook. If an individual stays, good; if they choose to move on, the individual already mentally moved on. (3) To replace the leaving employee, Google can now hire someone else to bring a new perspective into the company, and this new hire is not constrained by a non-compete.

Essentially, in an environment without non-competes, everyone wins, at least to some degree. The regional economic pie gets bigger.

To truly reinvigorate the Boston area technology sector and to set the stage for creating new anchor companies, employee non-compete agreements should be eliminated in Massachusetts — otherwise, all of the past impediments to success remain in place.

Notes and References

1. I have used this notion of “Would DEC still exist if non-competes didn’t” in presentations and discussions for a couple of years, and I originally drafted this a year and a half ago. Ken Olsen’s recent passing prompted me to finish collecting the data and to finish this writeup at this time.

With Ken’s passing, his quote about the home computer and the demise of DEC was often mentioned. This quote is almost always taken out of context. I encourage you to look at the more complete Snopes account of Ken’s statement.

DEC’s demise was not a failure of vision or a lack information, DEC had these. DEC’s demise was instead a failure of context and culture. There were simply no effective external forces to overcome the embeded status quo. There were no external forces because they couldn’t be built, and they couldn’t be built largely because of non-competes.

2a. This is not intended to be a discussion of Boston versus Silicon Valley. Instead, the discussion here offers data and perspective to support the elimination of non-compete agreements in Massachusetts. All indications are that until non-compete agreements are eliminated, the Boston area will continue to suffer an innovation deficit that will continue to compromise job growth and the regional economy.

2b. Whenever the Boston area is mentioned here, it refers more formally to the Boston CSA. Similarly, Silicon Valley refers to the San Francisco San Jose CSA.

2c. For an account of the regional differences between Boston and Silicon Valley, see Regional Advantage by Annalee Saxenian, published in 1994. Saxenian developed the book’s core ideas from 160 interviews mostly conducted between 1988 and 1991. DEC was already beginning to have some troubles when this book was written, but there was no reason to believe at that time that DEC would fail a few years later.

7. LexisNexis is the source used here for the historical SEC 10-K filings for DEC and HP. Getting the documents from LexisNexis requires login access. I did not find the filings available from a public online resource. HP has some of its historical annual reports available online.

8. In 1993, DEC’s 10-K changed the way it reported number of employees, by separately reporting the number of regular employees and contract employees. Prior years’ 10-Ks reported a single number combining regular and contract employees. Then in 1995 to 1997, only the number of regular employees was reported, the number of contract employees was not reported.

Chart 1 above depicts the combined number of employees from 1979 to 1994, and the number of regular employees from 1995 to 1997. Part of the drop in number of employees from 1994 to 1995 and continuing through 1997 is due to the removal of accounting for contract employees. In 1994, there were 5,000 contract employees reported, there might have been a similar number in 1995 to 1997, or not.

HP’s 10-Ks did not indicate any changes in how number of employees was reported.

9. It would be interesting to quantify the number and types of startups or job mobility that resulted from the elimination of non-competes due to corporate failures.